Financing from commercial banks to the private sector has surged by over 250% so far in the current financial year, primarily due to a gradual decline in interest rates in recent months, along with banks’ strategies to balance their advance-to-deposit ratios.
According to data released by the State Bank of Pakistan (SBP), credit to the private sector from the banking sector increased to Rs. 563 billion during the period from July to March 7 of the current financial year, compared to Rs. 155 billion reported during the same period last year. This represents a remarkable increase of 263%.
Islamic banks are leading the way in financing the private sector, providing Rs. 416 billion in credit, which is 288% or Rs. 309 billion higher than the previous year. The Islamic banking divisions of conventional banks contributed Rs. 104 billion, reflecting a growth of 236% or Rs. 73.1 billion. In contrast, conventional banks provided the lowest financing, lending Rs. 42 billion during the same period, although this still represents a growth of 150% or Rs. 25.2 billion compared to the previous year.
The banking regulator reduced the policy rate from 20.5% to 12% during this period, which has influenced interest rates and increased the demand for credit from the private sector. Additionally, banks have enhanced their financing to the private sector to avoid penalties from the banking regulator for maintaining low advance-to-deposit ratios (ADRs).
A significant portion of the planned financing has been directed toward the corporate sector and large entities, while financing in other sectors, including SMEs, agriculture, and consumer segments, remains low. Analysts believe that the stability of the economy and macroeconomic indicators, particularly low policy rates, may lead to further increases in credit uptake by the private sector.